Is Cambodia’s casino gamble paying off?

NagaWorld casino in Phnom Penh is booming but some doubt the Hong Kong-listed firm is paying sufficient taxes

ByDavid Hutt, Phnom Penh

From Phnom Penh’s riverine waterfront, the city’s skyline is commanded by the towering gold-gilded edifice of its newest NagaWorld-owned casino, the only gambling outlet allowed within a 200 kilometer radius of the capital.

From a national balance sheet perspective, Cambodia’s bid to become the “New Macau” is paying certain dividends. There are now an estimated 150 casinos operating nationwide in a sector that is earning the country billions of dollars, largely from visiting Chinese tourists.

But nationalistic claims of hostile Chinese takeovers of certain gambling boomtowns, and criticism that the social costs of casinos outweigh the low amount collected in taxes, are raising doubts about whether Cambodia’s gamble on gaming is truly paying off.

NagaWorld, a subsidiary of the Hong Kong-listed NagaCorp, saw its net profit rise to US$390 million, last year, up 53% from 2017. The gaming company’s gross gaming revenue (GGR), the amount gamblers wagered minus their winnings, was up 55% to $1.4 billion, according to its recently released annual report.

NagaWorld’s annual profit last year was almost equal to all Cambodian commercial banks combined, and was three times greater than the profits accrued by all the of the country’s microfinance institutions, one local newspaper noted.

Moreover, “VIP rollings”, the amount bet by high-stakes gamblers, hit a whopping $35.7 billion. In 2017, Cambodia’s entire gross domestic product (GDP) was only US$22.16 billion, meaning more money passes through a few upper-end rooms of one casino than the entire country.

Yet, while NagaWorld might have boasted a net profit of $390 million last year, it paid just $8.8 million in income taxes, a perceived as paltry payment that has sparked harsh criticism on social media.

Chinese punters at Phnom Penh’s NagaWorld casino. Photo: Facebook

The revelation comes as the government pushes for higher tax collection from much less profitable businesses and after one of the country’s only independent newspapers, the Cambodia Daily, shuttered in 2017 after being handed a back-dated $6.3 million tax bill its owners said was politically motivated.

The relevant government finance department said that NagaWorld’s annual report was unaudited and it expects the firm to pay more in tax since the published figures failed to take into account non-gaming revenues, including earnings from its hotels and restaurants.

The department, however, did not comment on the low rate of tax collected from NagaWorld’s gambling operations. Nor did it explain why there was no change in NagaWorld’s income tax payment amount despite a huge year-on-year rise in profits.

In 2017, NagaWorld’s net profit was $255.2 million, $135 million less than in 2018, yet it also paid just $8.12 million in income tax.

It is difficult to access the tax payment records of other casinos since many do not publicly publish their financials. All casinos must pay an annual $40,000 license fee, but other taxes are largely collected haphazardly, analysts say.

The Cambodian government plans to introduce a new law on regulating casinos this year that will include an updated tax code, but how much it will levy and on what income is still in doubt.

Cambodia is betting its growing gambling sector will become a new national profit center, especially as its key agricultural and garment sectors lose steam.

Last year, the government granted 52 licenses to new casinos, bringing the total number up to around 150. It’s unknown how many unlicensed casinos are in operation across the country. By law, Cambodians are not permitted to gamble in local casinos.

A Chinese casino lit up by night in Cambodia’s Sihanoukville. Photo: Facebook

The ruling Cambodian People’s Party (CPP), in power since 1979, has closely allied itself with Beijing since severing ties with the West and is apparently only too happy to turn parts of the country into a playground for wealthy Chinese.

In 1994, NagaWorld became the first casino in Cambodia to secure a gaming license, and it still holds a monopoly on gaming within and around the capital of Phnom Penh. Chen Lip Keong, NagaWorld’s Malaysian billionaire owner, has served as a personal economic advisor to Cambodian Prime Minister Hun Sen.

Analysts and critics say one major problem is that Cambodia doesn’t tax casinos based on their GGR, unlike other nations with gambling industries. As such, the amount of tax NagaWorld paid last year as a percentage of its GGR was less than 0.5%, its annual report shows.

Questions about the amount of tax NagaWorld and other Cambodian casinos pay isn’t new. In 2016, NagaWorld had to settle unpaid tax liabilities following a government audit that cited irregularities related in part to its non-gaming operations.

Now, some social media commentators have questioned why if NagaWorld’s VIP rollings were valued at $35.7 billion that the casino only turned a net profit of US$390.6 million, equivalent to about 1%.

It isn’t unheard of for casinos to struggle even as VIP gambling surges. Profits of Australian casino giant Star Entertainment Group slumped last year reportedly because of “abnormally low” house win rates in its international VIP divisions.

News reports note that in Macau, a special administrative region of China and the world’s largest gambling center, many VIP rooms in casinos operate as sites for money laundering or illegal money lending, among other illicit activities.

The Cambodian government has repeatedly denied accusations that its gambling and real estate sectors are rife with money laundering, chiefly from China. Yet the Basel Anti-Money Laundering Index, an annual ranking, has for years placed Cambodia near the top of countries most at risk of money laundering. Cambodia ranked 7th worst out of the 203 countries surveyed in its 2018 index, noting a deterioration in conditions.

NagaWorld owner Chen Lip Keong in a file photo. Photo: Facebook

NagaWorld’s sharp rise in VIP gambling, which increased 69% last year from 2017, is thought to be driven by a higher number of Chinese gamblers and the opening of Naga2, its high-rolling casino located across the street from its original operation. The firm also has plans to open a third casino, Naga3.

The combination of soaring profits and stagnant tax payments is fueling public concerns about how casinos operate in Cambodia. Most casinos are now being built in Sihanoukville, a coastal city that has become a hub of Chinese investment.

By one provincial governor’s estimate, over US$1 billion has been invested in the city by the Chinese government or businesses since 2016. The provincial governor recently estimated that 30% of the city’s 300,000 population is now Chinese.

The investment has created business opportunities but also polarized local residents. Land and rental prices have skyrocketed – tripling in some places in the city – while locals say that so, too, has prostitution, kidnapping and other crime.

The Interior Ministry last year created a new task-force to deal with the city’s problems, while Phnom Penh has reportedly asked for Beijing’s assistance in dealing with the problems.

Still, the government maintains the positives outweigh the negatives. More than two million Chinese tourists visited Cambodia last year, up almost 70% from 2017. That figure is expected to grow to three million by 2020, according to the Ministry of Tourism. The ministry estimates that tourism brought in $3.6 billion in revenue in 2017, or about 13% of GDP.

A recent issue of Casino Review, an industry publication, described Cambodia as the “New Land of Opportunity.” But to regulate this new wild and wholly gaming scene, the government must soon pass new legislation.

A new draft “Law of the Management of Integrated Resorts and Commercial Gaming” (LMGT) aimed at regulating casinos has already been accepted by several ministries and it currently being reviewed by the Council of Ministers, the government’s cabinet.

It must then go before the CPP-stacked National Assembly and Senate, which is almost certain to accept whatever the government puts before it. It is expected to be passed sometime this year.

If and when passed, the law will create a new cross-ministerial regulatory body, the Integrated Resorts Management and Commercial Gaming Committee, and three new classifications for casinos: prohibited, promoted and favored.

Such classifications will dictate where casinos can be built and for how long casinos can maintain their licenses. In the new lexicon, Sihanoukville will be classified as a “favored” zone, while Phnom Penh, where NagaWorld holds a monopoly lease, will be considered “promoted.” The LMGT is also expected to establish a new tax code for casino operators.

Andrew Klebanow, a partner at Global Market Advisors, a consulting firm that specializes in gaming industries, said in a recent interview with Casino Review that Cambodia’s new gambling taxes would be worked out as a percentage of a casino’s GGR, while different tax rules would apply to casinos located in “promoted” and “favored” zones.

Macau, for example, imposes a 35% tax on GGR, though other direct taxes on gaming are applied at 39%. In total, its semi-autonomous government collected some $12 billion in taxes from casinos in the first 11 months of last year, according to data from Macau’s Financial Services Bureau.

If Cambodia was to charge a similar 35% rate on GGR, it could have collected roughly $490 million in taxes – rather than the paltry $8.8 million in income tax it actually collected – from NagaWorld last year, based on the firm’s $1.4 billion GGR.

The proposed new tax rates have not yet been made public, though industry experts doubt the new rate will be set as high as Macau’s. One industry expert, who asked for anonymity, said they don’t expect Cambodian authorities to impose a tax on GGR any higher than 10% and possibly considerably less.

Singapore, by comparison, charges tax on GGR at between 5% and 15%. Cambodia will certainly not want to lose its image as a low-cost alternative for investors and punters. But even a 10% tax on GGR would have last year raised $140 million from NagaWorld, or roughly a third of what the Cambodian government plans to spend on health care services nationwide in 2019.